Thursday, 15 September 2016

Significant SCC Decision Increases All Risk Insurance Coverage

Today, the Supreme Court of Canada (the “SCC”) issued a decision
dealing with coverage under a builders’ risk insurance policy that has
important implications for owners, contractors and insurance
companies. At issue was the interpretation of the exclusion of coverage
for “the cost of making good faulty workmanship,” which appears in
many commercial risks policies.

Following installation of windows at a highrise commercial tower,
the window cleaning company hired by the owner to remove paint from the
windows scratched and damaged the surfaces by using improper tools and
methods. The owner submitted a claim for the costs to replace the
damaged windows. The insurance company denied coverage relying on an
exclusion in the policy precluding coverage for the “costs of making
good faulty workmanship”. There was an exception to this exclusion that
the owner relied upon. This exception provided that coverage would
still be available for physical damage resulting from the faulty
workmanship.

The SCC confirmed that the insured has the initial burden of proof,
and must establish that the scope of coverage encompasses the damages.
In this standard form builders’ risk policy, the coverage was very
broad and included all physical loss and damages. At trial, the
insurance company conceded that the damage fell within the broad
coverage. Once this initial burden is met, the insurance company had to
establish that any exclusions in the policy applied. Thus, the issue
to be determined was whether the physical damage to the windows
resulting from the improper cleaning methods was covered by the policy
as an exception to the exclusion.

In this case, the SCC overturned the Alberta Court of Appeal,
agreeing with the owner that only the costs of cleaning the
re-installed windows would not be covered as a result of the exception.
They concluded that it is not necessary for an exclusion to have a
direct correspondence to physical loss. Instead the exclusion could be
limited to the costs of the faulty workmanship alone. The result was
that the exclusion clause only applied to the cost of redoing the
faulty work (i.e. the cost of re-cleaning the windows). The physical
damage to the windows themselves was not excluded due the exception for
resulting damage. The SCC agreed that both of the proposed
interpretations from the owner and the insurance company were plausible
such that the contract was ambiguous. The court resolved the ambiguity
based upon the overarching purpose of the insurance contract which is
to provide broad coverage. The owners’ interpretation furthered the
purpose of the contract. Conversely the insurance company’s
interpretation undermined the purpose of the policy. The insurance
company was required to pay for the replacement costs of the windows
and could only refuse to pay for the cleaning costs afterwards under
the faulty workmanship exclusion.

The fact that the window cleaning company was different from the
window installation company appears to be significant. If only one
company had installed and washed the windows under a single contract,
it seems that the exclusion clause would have precluded coverage for
the cost of replacing the windows and subsequent cleaning. If there had
only been one contract, the SCC appears to suggest that the faulty
workmanship would relate to the entire scope of work for both
installation and washing such that the faulty workmanship exclusion
would have precluded coverage for the replacement costs.

The result of this decision is very significant for parties to
construction insurance contracts which are variably referred to as
builders risk, contractor’s risk, all risks, multi-risk and course of
construction insurance. Typically these policies are issued to owners
and general contractors to cover all physical risks to the construction
site.

In light of this decision, it may be prudent for owners and
contractors to separate work that poses significant risks of damaging
other expensive portions of the project into separate contracts with
different trade contractors. This could facilitate increased coverage
under a builders’ risk policy by establishing a basis for owners and
contractors to argue that faulty workmanship is limited to the scope of
each contract and therefore any detrimental effect of poor performance
by one contractor upon other another contractor’s work fits within the
exception of resulting damage (and therefore the loss is insured).
Arguably this would establish coverage for losses that would otherwise
be excluded on the basis of faulty workmanship if all the work is
performed under one contract. Overall, this decision certainly benefits
owners and contractors by confirming a broader interpretation of
builders’ risk policies.

Insurance companies should be aware that the exception for resulting
damage from the exclusion of coverage for faulty workmanship will not
afford them the degree of protection they may have intended, or
believed to be in place based on prior case law. In this case, an
improperly performed $45,000 window cleaning contract resulted in
approximately $2.5 million in liability for the costs to replace
windows that were damaged as a result of faulty workmanship.

Disclaimer

All posts made to this blog are a general overview of the subject matter and cannot be regarded as legal advice.Please contact Corbin Devlin or any member of our Construction Industry Group for advice on this or any other construction related topic.